County Government

Leverage devolution to make Kenya’s economy more resilient to politics

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This article first appeared in my weekly column with the Business Daily on November 12, 2017

A few weeks ago the Kenya Private Sector Alliance stated that the business community had lost more than KES 700 billion in just four months of electioneering. This figure was arrived at by costing not only business lost due to disruptions linked to protest and general unrest, but deferred investment decisions as well.  The economy’s performance this year is weaker than last year. The economy expanded 4.7 percent in Q1, down from 5.9 percent 2016, with Q2 at 5 percent, down from 6.3 percent last year. Previous analysis indicates that the Kenyan economy tends to slow down in an election year by about 1.2-1.4 percent. Of the 10 elections the country has had, 7 have been associated with slower economic growth and it takes about 26 months for the economy to fully recover from an election.

While there is warranted concern about the extent to which economic performance is tethered to politics and elections, other dynamics in the country have also negatively informed growth this year. These include the drought which led to a contraction in agriculture which constitutes about 30 percent of the economy. Additionally the interest rate cap negatively affected the financial sector which constitutes about 10 percent of the economy with knock-on effects felt in a contradiction in access to credit particularly to SMEs. Thus even without the effects of the election, at least 40 percent of the country’s economy was struggling this year.

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(source: https://softkenya.com/kenya/wp-content/uploads/2011/11/Kenya-Economy.jpg)

That said, there does need to be an examination as to why economic performance during election years tends to be more muted than would have been the case if there were no election. Clearly key investment decisions from the private sector tend to be deferred in an election year while any decisive action in policy is deferred by government. The question now becomes what can be done to make the economy more resilient to politics and elections such that Kenyans are buffered from related uncertainties. Leveraging devolution with a focus on county governments and county private sector is key to achieving this.

The first step in building resilience is by encouraging a fundamental shift in the mind-set of county governments. At the moment county governments seem to view themselves primarily as expenditure units, not development units. Rather than obsessing over what allocations have or have not been made to them, county governments have to enter a mind-set where every penny is targeted at ensuring they drive economic development in their counties.

Secondly, county governments ought to listen to concerns of the private sector in their counties. Kenya’s private sector is dominated by informal businesses as 90 percent of Kenyans are employed in this sector and rely on it for their income. Yet the informal sector does not truly feature in county development documents, this needs to change. County governments, perhaps with the support of the Ministry of Trade ought to create a robust informal sector strategy that works to address structural weaknesses that compromise the sector’s robustness. These could include piloting formalisation schemes, improving technical and business management skills, and creating financial structures that provide patient capital to informal businesses. The aim should be to stabilise informal businesses so that they continue to perform even during difficult political times.

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(source: https://i1.wp.com/kenyanlife.info/wp-content/uploads/2016/11/Counties-in-kenya.png)

Finally, county fiscal policy must be deliberately development oriented. Dockets such as agriculture, health and devolved education functions ought to feature prominently in county government allocations. By investing in food security through agriculture and human capital through education and health, counties can play a powerful role in building a population that is healthy and educated, and thus better able to identify and exploit economic opportunities that build income.

Anzetse Were is a development economist; anzetsew@gmail.com

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Systemic fiscal weaknesses need to be urgently addressed

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This article first appeared in my weekly column with the Business Daily on June 25, 2017

Last week the International Budget Partnership (IBP) presented information on what is driving fiscal performance at national and county level, with a focus on revenue inflows. This is a behemoth task in itself due to significant data gaps that impede comprehensive analysis. For example, gazettes released by the National Treasury tend to be incomplete and it is not clear when the disbursements actually happen. Additionally, figures frequently change (particularly revenue inflows) mid-year with no explanations and the same information can be presented in numerous formats making analysis on consistent data sets difficult.

That said, there is enough data from FY 2011/12 to 2016/17 to make some important observations. The first challenge that has emerged has to do with the sequencing of revenue inflows into National Treasury that affects county budget disbursements. National Treasury does not receive all of the revenue required to be dispensed over the fiscal year in equal tranches; that is 4 sets of 25 percent of revenue each quarter over the fiscal year.

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According to data over the time period analysed, in Q1 only about 20 (not 25) percent of total revenue in-flows have been received, this goes up to 47 percent by mid-year. What this means is that the bulk of financing for the fiscal year is received in the second half; as a result national government disbursement to counties follow a similar pattern where the bulk of county finances are sent in the later half of the year. This may explain complaints by governors that they do not get their disbursements on time and they blame Treasury for this.  But to be fair, National Treasury is not in full control of when revenue inflows come in. Nonetheless, since it is clear that this is a systemic issue that recurs, national government ought to start taking remedial action so that county governments are not affected by their revenue inflow constraints.

However, county governments are not innocent bystanders when it comes to fiscal weaknesses; counties almost consistently fail to approve their budgets on time and thus do not submit the attendant requisitions that lead to allocations. It seems that in most cases, county budgets have not been approved by the June 30 deadline; this leads to delays in disbursements. The factors behind these delays at county level are not clear but seem to be an amalgam of county capacity constraints as well as disagreements between County Executives and County Assemblies on what should feature in county budgets.Image result for fiscal policy

(source:https://www.proprofs.com/quiz-school/topic_images/p1aclsjbd41ijh1l7t1i071j3ckog3.jpg)

A third factor at play that is informing fiscal performance is to do with sources of revenue. We know that county governments are still very poor at generating their own revenue and thus are almost entirely reliant on national government allocations. This makes them less autonomous in controlling their fiscal performance. At national level, the issue is that government is being increasingly affected by delays in revenue inflows partly because taxes are making a decreasing share of national government revenue inflows. National government is becoming more reliant on other sources of revenue beyond taxes, which means more borrowing and government often does not control when those disbursements are received. So at both county and national level, government is not in full control of revenue inflows which leaves the country exposed to cash crunches on which quick remedial action cannot be taken.

It is important that national and county government develop revenue inflow strategies that mitigate current challenges so that expenditure and development plans can be more efficiently effected.

Anzetse Were is a development economist; anzetsew@gmail.com

 

How counties can attract smart investment

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This article first appeared in my weekly column with the Business Daily on April 16, 2017

The decentralisation of Kenya ushered in the county structure giving county governments power that was previously unavailable at that level. Sadly what seems to emerging is a focus by county governments is a focus on revenue generation through the imposition of new fees and levies on the private sector. This is arguably one of the most intellectually lazy means of generating income. In some ways it can be argued that the imposition of CESS, advertising fees and myriad of other fees is actually killing the business environment and the ability of private sector to generate jobs and money. So what short, mid and long term, can counties can deploy to attract the right type of investment and generate revenue?

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(source:www.montefeselfstorage.com/wp-content/uploads/2015/06/French-Investments.jpg)

An important action that can be done immediately is to determine the competitive advantage of counties. Within the County Integrated Development Plan (CIDPs), counties should articulate their competitive advantage, and strategies aimed at capitalizing on these in a manner that makes them profit and job generators. Further, it is crucial that important county leaders are identified. These include both those who live in the county as well as those with an attachment to the county. These leaders should be identified from all levels and include leaders in the private and public sectors, NGO leaders, village elders, women leaders, youth leaders as well as leaders from the disabled community. This county leadership should be consulted to develop an investment strategy in order to, among other things, identify county needs (health, education, infrastructure etc.), identify projects related to meeting these needs that are viable, identify sources of funding, develop the capacity required to raise the funds and source the skilled individuals needed to manage and implement the county projects.

In the mid-term, counties need to make an effort to make the county attractive for investment to both foreign and local investors. This includes reducing administrative and regulatory costs of doing business in the county, creating clear implementable strategies for ensuring stability and security, developing robust education and health structures and being seen to be visibly addressing corruption through the development of transparent county level public financial systems. Additionally, counties should participate in the Sub National Ease of Doing Business Index by the International Finance Corporation to determine how competitive their counties truly are.

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(source: https://anzetsewere.files.wordpress.com/2016/10/89a66-small-business-in-kenya-invest-africa-businesses.jpg)

In the mid to long term the county can make efforts to develop Public Private Partnership mechanisms to pull in the private sector to address county population needs. County governments should also clearly define accessible career pathways for the current and future skill needs of the county so as to identify those who are already well suited for key activities in the county in order to catalyse economic activity.

In the long term, counties should consider the development of an investment fund where some revenue can gain interest. This can be divided into short, medium and long term strategies that include deposits, treasury bills, treasury and corporate bonds as well as strategic equities with the ultimate aim of creating a county ‘sovereign wealth fund’. Through these strategies, county governments can build capital in a sagacious manner.

Anzetse Were is a development economist; anzetsew@gmail.com

 

My Insights into Kenya Budget 2016/17

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This article first appeared in my weekly column with Business Daily on June 12, 2016


Last Wednesday the National Government announced the National Budget for 2016/17. Overall expenditure and net lending for FY 2016/17 will be KES 2,264.8 billion, about 30.6 percent of GDP. Estimated revenue collection is KES 1,295.4 billion or 19.7 percent of GDP by end of June 2016. As a result there is a financing gap of KES 691.5 billion which reduces to KES 603.2 billion if the Standard Gauge Railway (SGR) is excluded. Please note that the Treasury Cabinet Henry only gave the fiscal deficit as 6.1 percent of GDP excluding the SGR; the full fiscal deficit was not detailed in the budget speech. The deficit will be financed by net domestic borrowing of KES 225.3 billion plus what was termed ‘other domestic financing’ of KES 4.0 billion. Net external borrowing will be KES 462.3 billion.

There are several points to note with regards to the budget. Firstly, if one has been following the Kenya budget formulation process for several years it is clear that expenditure is ramping up faster that revenue generation is. As a result the fiscal deficit continues to be sizeable, trending towards consecutive expansion year after year. Once again, the fiscal deficit, even excluding the SGR is above the Government’s own preferred ceiling of 5 percent. It seems to have become habit for Government to state that fiscal deficits may be a bit high currently but will come down in the medium term. This year is no different; CS Treasury made the point that Government continues to be committed to bringing the fiscal deficit down gradually to below 4.0 percent of GDP in the medium term. From where I’m sitting it looks like reducing the fiscal deficit is a moving target that Government pushes out another year during each annual budget speech.

(source: http://cctv-africa.com/wp-content/photo-gallery/2016/05/SGR.jpg)

The core problem with the fiscal deficit is that revenue generation has been subpar and revenue targets are routinely not met. I think part of the problem is that the rapidly expanding expenditure has led Government to set aggressive and frankly unrealistic targets for the Kenya Revenue Authority. There are several structural constraints in the Kenyan economy that undermine revenue generation a key one of which is a sizeable informal economy that exists outside the formal tax net. Although the CS noted the challenges of the informal economy remaining largely untaxed and undermining revenue generation efforts, no specifics on how this will be addressed were mentioned.

Secondly, in terms of borrowing for the fiscal deficit, the bias is towards external borrowing. This is understandable as Government does not want to crowd out private sector or effect upward interest rate pressure if domestic borrowing preponderated. However, it will be interesting to see how such aggressive external borrowing will play out given the highly publicised Eurobond debacle last year where the political opposition accused Government of embezzling Eurobond proceeds. This event dented the Government’s reputation in international financial markets. It will therefore be interesting to see the types of risk premiums that will be associated with Kenya Government borrowing in pursuit of foreign credit.

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Finally, KES 280.3 billion will be allocated to the 47 County Governments as the equitable share of revenue. While Government noted that this allocation is more than double the constitutional minimum of 15 percent of the latest audited revenues, there was no mention of the fact that Counties are having problems absorbing devolved funds, particularly in the development expenditure docket.  According to the Controller of Budget’s latest report, only 19.9 percent of development funds had been absorbed as of mid-year. This inability to spend funds as required may well translate to limiting the extent to which Devolution will deliver the development dividends it was intended to deliver. Thus while it is wonderful to see National Government’s continued commitment to deploying funds to counties, it would be useful for National Government to make suggestions on how County Governments can better absorb devolved funds.

Anzetse Were is a development economist; anzetsew@gmail.com

 

What does Devolution in Kenya look like economically speaking?

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This article first appeared in my weekly column with the Business Daily on May 29, 2016

When the new constitution was promulgated it was heralded as a positive for development for Kenyans as government would be brought closer to the people and local communities. The idea was that county governments domicile in counties would facilitate higher levels of transparency particularly in terms of how money allocated to county governments was spent.  Under the new constitution, there is an allocation for counties by National Government, the equitable share which is a single, unconditional block grant to carry out devolved functions. This amount is meant to increase year on year, and the Budget Policy Statement for 2016/17 proposes increasing the unconditional transfer to counties from KES 259.8 billion to 284.7 billion. Is this enough? The World Bank has stated in the past that county governments have benefitted from an allocation of one-fifth of the total national expenditure, or an equivalent of 4% of the Gross National Product which is more than was negotiated when the August 2010 constitution. However, counties are always fighting for more money for ‘development’ but let’s take a look at county level spending patterns.

The report by the Controller of Budget (COB) states that for the Financial Year (FY) 2015/16 aggregate approved county allocations which of which 55.3 per cent was allocated for recurrent expenditure 44.7 per cent for development expenditure. However, as of the half-year review of expenditure, development expenditure stood at an average 26 percent despite being allocated 44.1 percent.  Kwale had the highest use of development expenditure at 61.5 percent and Taita Taveta lowest at 0.1 percent expenditure on development. In terms of the major cities, Nairobi development expenditure stood at 20 percent, Kisumu at 21.1 percent and Mombasa at 25.6 percent. All the major cities had development expenditure below the national average and well below the allocated 44.7 percent.

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 (source: http://ilakenya.org/wp-content/uploads/2015/07/Kenya-counties-map.jpg)

An additional challenge is that counties seem to be having trouble absorbing funds allocated. As of the half-year review, counties had an absorption rate of 31.3 per cent of the total annual County Governments’ budgets. The absorption of development funds was particularly low at 19.9 percent, a decline from an absorption rate of 21.9 per cent reported in a similar period of FY 2014/15. Thus we see a core spending pattern at county level where development expenditure is lower than was allocated in terms of percentages allocated and a very low absorption rate of development funds in particular. This is a troubling trend as it is the development docket through which new services can be developed to make access to basic services more available to the citizenry as well as stimulate more economic activity at county level.

In my view poor absorption levels are a reflection of a basic lack of capacity in county governments. Even the COB notes that some counties do not have designated administrators for public funds making the operationalization, administration and accounting for the funds difficult. If even managing public funds is challenging, clearly county governments need support in determining what development projects should be funded and the implementation thereof.

(source: https://citizentv.co.ke/wp-content/uploads/2015/07/rsz_kenyan-shillings.jpg)

It would be useful for organisations active at county level to work with county governments to conduct a skills audit at county level to see what talents are domicile at county level. This should be followed by an audit of the skills required for development projects so that the key skills requirements and gaps are clear. What do development projects need? Quantity surveyors, accountants, engineers? The audits are crucial. This can then be followed by a more structured strategy to acquire the skills required to move development projects at county level forward.  It is time for the pattern of a failure to use development funds to stop because this continued failure will translate to a general failure of devolution to generate the development dividends it was designed to create.

Anzetse Were is a development economist; anzetsew@gmail.com

The potential abyss of county government borrowing in Kenya

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This article first appeared in the Business Daily on February 7, 2016

The National Treasury has expressed concern over counties borrowing money domestically without permission from national government. In the 2014/15 Financial Year four counties borrowed a total of Sh1.9 billion, with Nairobi being the biggest borrower at Sh300 million. Technically, counties are only allowed to borrow from the domestic market to fund capital projects with high economic growth potential in line with the Public Finance Management Act. As a result, Treasury has instructed all bank and non-bank financial institutions to stop lending to counties and start recovery of un-guaranteed loans.

Counties however argue that they are being forced to borrow because government routinely fails to send money in on time to meet their financial obligations. In fact a county official with whom I talked to about this issue said that if government released funds on time, counties would have no need to seek commercial loans to finance their activities. The official further added that the process of government releasing county funds to county accounts is long, cumbersome and bureaucratic and thus counties always find themselves with pending payments they cannot meet thus pushing them to seek loans to meet their obligations. The Treasury argues that there is no need for counties to seek credit because counties have been leaving billions of shillings idle in their reserve fund accounts at the Central Bank of Kenya. The county official asserted that this is not the whole story; for example some counties have activities that need to funded such as arrears in bills left by previous county governments that need to be settled urgently, yet the procedures for applying for funds are so long and laborious that they have to borrow to meet short term costs. However, the real issue here is not the bickering between central and county government, the issue is uncovering the implications for the country in counties racking up debt in an unchecked manner.


(source: http://www.lincoln.ac.nz/Documents/farmdebtjpg.jpg)

Firstly, a real concern is that the rates at which counties are getting access to credit and whether these are sustainable and realistically serviceable. Indeed, if left unchecked county debt could create a scenario where money is siphoned away from required expenditure to meet debt obligations.

Linked to the point above, borrowing by counties does not seem to be informed by the ability of counties to generate independent revenue to not only finance local activities, but debt obligations as well. County revenue generation at county level in Kenya is anemic; in the financial year 2013/2014 county generated revenue accounted for a mere 25 percent of their budgets. Further, counties have been lazy in gunning for the tax option to raise revenue and the resistance they face on this means it may take time for counties to raise significant revenue locally. Yet counties have already started borrowing in a manner not necessarily informed by their revenue generation capacity. Thus, a scenario could unfold where counties have to seek bail outs from central government to meet their debt obligations.

Thirdly, the potential escalation of county government debt in the regions with little transparency is particularly problematic. Until county governments demonstrate a commitment to transparency and anti-corruption, county level indebtedness may not lead to development or economic growth. As a result county governments may find themselves servicing what has been essentially dead debt.

(source: http://www.theeastafrican.co.ke/image/view/-/1722304/medRes/477466/-/maxw/600/-/41bid7/-/county.jpg)

Finally, county government debt accumulation may mean that the government as a whole becomes increasingly leveraged, the extent of which is uncertain. It is crucial that central government keeps track of total government debt divided between central and county governments. A threshold level of debt accrued by county governments has to be determined so that any county level borrowing does not cross an upper limit that could over leverage the country.

 Anzetse Were is a development economist; anzetsew@gmail.com